Complacency Everywhere

Josh Brown had a quick little post this week about the comparisons with the 2007 market highs which summarized the current volatility environment quite nicely:

“To recap – Volatility is nowhere to be found – not in currencies, in fixed income or in equities. Complacency rules the day as investors and institutions gradually add more risk, using leverage and increasingly exotic vehicles to reach for diminishing returns in an aging bull market.”

Now, we’ve all seen the headlines recently about stocks being at all time highs and volatility getting lower and lower and lower. And the chart trotted out more often than not to show this is everyone’s favorite volatility measure, the VIX, which is currently sitting at fresh 7 year lows…

Vix 7 Year Lows(Disclaimer: Past performance is not necessarily indicative of future results)
Data Courtesy: Yahoo Finance

But here’s the thing that’s driving those who do more than just stocks (read: global macro, fixed income traders, currency traders, managed futures, etc.) —  CRAZY.  You see, it isn’t just the stock market that’s seeing record low volatility. Complacency is everywhere. It’s for sure in stocks…, but it’s also in Bonds (the tightest 3 month range in 35 years), it’s in Currency markets (the tightest consecutive monthly ranges in the Euro since inception), and it’s in Energy markets (Crude Oil’s only moved in a 14% range this year, the smallest reading in 20 years.

But don’t just take our word for it… here’s one of the charts accompanying Goldman’s President Gary Cohn’s presentation explaining why the bank is having issues making trading profits, with a nice breakdown of the low volatility in bonds and the Euro, in particular – along with stocks.

New Picture(Disclaimer: past performance is not necessarily indicative of future results)
Charts Courtesy: Zerohedge

And here’s a rather ugly chart courtesy of Market Watch showing just how low volatility is in no less than 20 different currency pairs. Those red triangles under red bars on top of blue lines next to dark blue x’s with a purple bar through it represent the current one month implied volatility for each currency pair.

FX volatility(Disclaimer: Past performance is not necessarily indicative of future results)
Chart courtesy: MarketWatch

If you’re having trouble reading the chart (we don’t blame you), here’s how they explain it:

“The current implied one-month volatility is denoted by the red triangle in the chart. “Implied volatility is below the 5th percentile of the history of implied volatilities (since 1999 in most cases),” wrote Jordan Rochester, Jens Nordvig and Rahul Jain of Nomura in a note.”

And then there’s the low volatility in Crude Oil we discussed not long ago, where the range through the first five month’s of the year has been a paltry $14, or just 14% of the difference between the high and low. We went back and took a look at the annual range in crude oil as a percentage of the high/low price average – and you’ll see the same pattern:

Crude Oil Range
(Disclaimer: Past performance is not necessarily indicative of future results)

What’s happening – is all really right in the world and this complacency is deserved, or is this the proverbial calm before the storm. The Goldman presentation blamed government intervention, and we think back to a piece in 2013  by managed futures heavyweight Transtrend which looked at the tall heads associated with low volatility, and how that pinching of the curve naturally leads to a widening of the tails… (it has to go somewhere).Where does the ‘missing’ risk hide? Precisely: in a higher kurtosis. All these 0% return days form a high peak…this peak pulls the distribution ‘inward’ (i.e., like we have seen above, the standard deviation downwards), causing the returns on the outsides to now overshoot the Normal curve. There we have our ‘fat tails.’

“…What we see here is the exchange of standard deviation for kurtosis. The risk stays the same, but through the lower standard deviation it is more treacherous. It is now hidden in the higher kurtosis. Remember we did not increase the kurtosis by a direct addition of tail-risk, but by adding an (in itself not dangerous) high peak. To those who are not alert to this phenomenon, such a high peak may give a false sense of security.”

 

4 comments

  1. […] latest example looks to be the Currency Markets, where our talk of record low volatility at the beginning of the summer has given way to some of the most volatile currency market trading […]

  2. […] latest example looks to be the Currency Markets, where our talk of record low volatility at the beginning of the summer has given way to some of the most volatile currency market trading […]

  3. […] latest example looks to be the Currency Markets, where our talk of record low volatility at the beginning of the summer has given way to some of the most volatile currency market trading […]

  4. […] latest example looks to be the Currency Markets, where our talk of record low volatility at the beginning of the summer has given way to some of the most volatile currency market trading […]

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Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

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